Fiduciary Duties

Question One Fiduciaries have important obligations and duties some of which have been stretched to encompass areas which have not traditionally formed part of the duties. This assignment will explore some of these duties and discuss whether or not they have been stretched to there limit. It will be concluded that fiduciary duties are particularly onerous but that there are necessarily so. The same conclusion will be made in relation to situations involving a breach of trust. Only a brief consideration will be given to both the obligations and duties of the trustee as well as what will happen in the event of a breach of trust, as this area is vast. It is first important to consider the distributive duties of the trustee as these are perhaps the most important and most off cited duties. In relation to distributive duties these can be divided into the powers of maintenance and advancement.

The statutory powers of maintenance and advancement apply only in so far as a contrary intention is not expressed in the trust instrument[1]. In the case of IRC v Bernstein[2] the settler had directed that the income on his trusts should be accumulated during his lifetime and this was held to be evidence of an intention to exclude the statutory power to make an advancement of capital moneys. The court found that the settler had clearly intended that capital should not be distributed until his death. The direction to accumulate would, of course, be evidence of an intention to exclude the power of maintenance also. Prior to the enactment of the Trustee Act 1925 the settlor’s intention in relation to distributive duties was of utmost importance. These commonly allowed the trustees to apply the income for he “maintenance or benefit” of the infant, and as such, they gave the trustees a considerable discretion to pay money for the advantage of the infant, even if this also benefited the infants parents. Now, s31(1) of the Trustee Act 1925 contains an extensive power of maintenance that is available to trustees of qualifying trusts, unless an express or implied contrary intention appears. In Re Ransome[3] a similar direction to accumulate income was held to amount to an intention to exclude the trustees’ duty to pay income on accumulations under s31(1)(ii). This was in spite of the fact that the direction to accumulate was held to be void for perpetuity.

The beneficiary in this case got the worst of both worlds. They did not receive the accumulations which the settler had intended should be made for their benefit, but neither did they receive the income released when the direction to accumulate was declared void. Re Ransome looks like a case where the settlor’s presumed “contrary intention” under s 69 (2)[4]. Specifically s 31(1) provides that, where a person has a vested or a contingent interest in a trust, then, during that person’s infancy, the trustees may pay to his parent or guardian (if any), or otherwise apply the income, for his “maintenance education or benefit”. Necessarily, what amounts to the maintenance, education or benefit of the infant will be a matter of construction in each case, and s31(1)(i) (b) makes it clear that the power may be exercised even if “any person is bound by law” to provide or the infant.

Unfortunately, however, this matter is not as simple as this, and the statutory power is subject to some important and confusing restrictions[5]. In relation to the power of advancement the situation is lot less complex. The power to give a beneficiary part of the capital sum to which he or she may be entitled under the trust, but in advance of the time the capital sum actually becomes payable (if at all). The idea is simply that the trustees may wish to pay over part of the capital to a beneficiary who is entitled in the future or only entitled if certain events occur. As stated in Pilkington v IRC[6] use of the power will accelerate a beneficiary’s entitlement to capital, even if that entitlement is not certain, providing that to do so would be for the benefit or maintenance of that person. As with the statutory power of maintenance, the power ca be excluded by contrary intention[7] and no payment may be made which prejudices the rights of a person with a prior interest unless that person is of full age and consents in writing[8]. It is perhaps the most fundamental duty of a trustee that he should manage the trust in accordance with the terms of the trust. Any deviation from this obligation or from the obligations of trusteeship imposed by the general law will constitute a breach of trust for which the trustee will be liable personally. Necessarily, this liability can arise in many different situations, but it may be triggered by either a positive act of commission or a failure to act when action was required.

Examples of the former include the distribution of the trust property to the wrong people or at the wrong time, investment of trust funds contrary to a restriction in the trust instrument and , of course, the use of the trust property for personal gain. Examples of the latter include a failure to distribute the trust property, failure to exercise discretion, failure to have the trust funds transferred to those persons employed to act on behalf of the trust. Any act or omission which violates the high standard of stewardship required of trustees or which is in contravention of the terms of the trust, or which amounts to inadequate performance of the powers and duties of a trustee, is a breach of trust. This fiduciary duty is strict and it is enough that the trustee has committed the act or omission which amounts to a breach of trust. It is irrelevant for liability whether the trustee knew he was committing a breach of trust and did so for his own benefit, was reckless as to the possibility of a breach occurring, was negligent of the same or was entirely innocent and honest. Thus, it remains a breach of trust for even if he believed he was acting in conformity with the terms of the trust[9] and did so in the belief that his action was in the best interest of the beneficiaries[10]. Indeed although the entirely innocent trustee can ask the court to relieve him from the full consequences of liability, it is clear that the obligations of trusteeship are far reaching and powerful and even the most judicious and careful of trustees may not escape an action for breach of trust. The only possible exception to the strict nature of the liability for breach of trust is where the breach was entirely technical, was undertaken for the benefit of the beneficiaries and was such that the court would have authorised it had the trustee sought its permission in advance[11]. It is therefore concluded that this area of law is particularly difficult and strict and that it has been expanded a great deal.

However it is argued that this is necessary in order to encompass the increasing incidences of such duties and the increasing variety of situations in which a trust is created. In order, much like any area of law, to reflect the true position and address beneficiaries interests the law must be stretched to its limits in order to encompass the needs of such beneficiaries. So whilst the statement can said to be true, it by no means suggests that is a negative situation. Beneficiaries in all circumstances should have their interests protected. Question 2 The first issue that arises is the flat that is to go to Natasha. Davina will technically become the legal owner of the estate of the deceased, although he is obliged to exercise the rights of ownership in accordance with the wishes of the deceased. Davina therefore holds the property that was lost.

The essential duty imposed upon a trustee is to distribute the trust property according to the wishes of the settlor or testator and in conformity with the terms of the trust, and this cannot be delegated to an agent or professional advisor[12]. This question also raises issues in relation to the law of secret trusts. In essence, secret trusts are those trusts which operate in relation to testamentary disposition but where either the very fact and details of the trust are not declared in the testator’s will (fully secret trusts) or where, although the facts of the trust is declared in the will, the identity of the beneficiaries is not (half secret trusts).[13] This is a half secret trusts as the facts of the trust have been declared in the will but not the identity of the beneficiaries. Secret trusts are regarded as valid and enforceable despite the fact that they do not comply with the strict requirements of formality found in s9 of the Wills Act 1837. The terms of the legacy to the RSPCA are equivocal. In order for the will to impose a trust on the legatees, the words used must be sufficient to impose a trust obligation as a matter of law; there must be certainty of intention. In order to create a successful trust there must be certainty as to the nature and the extent of the trust property[14]. The validity of a trust will depend on “first, that the words must be imperative, secondly, that the subject matter be certain and thirdly, that the object must be as certain as the subject[15].” Certainty of intention means that must make it clear by the words he uses that the holder or transferee of the property is under a mandatory legal obligation to carry out his wishes so far as the law allows. Borris has made it clear that Davina is the executrix of the will and therefore holding the trust property for the benefit of the beneficiaries. Certainty of subject matter is an equally vital element in the formation of a trust. This can be said to be the case here as both the trust property is clearly defined or definable and the interests of the beneficiaries are easily defined or definable. Certainty of objects is perhaps the most important certainty and this requires that the beneficiaries under the trust must either be named individually or be described by reference to a class description that is itself certain in scope. The beneficiaries are clearly defined here. Next we must deal with the money that is to go to the Littleton Branch of the League of Cruelty to Animals.

Borris has instructed that the money should go to the “such deserving members of the Littleton Branch of the League of against Cruelty to Animals and if this gift should fail the money should go to the RSPCA. As discussed certainty of objects is perhaps the most important certainty and this requires that the beneficiaries under the trust must either be named individually or be described by reference to a class description that is itself certain in scope. First it is necessary to determine the nature of the trust affecting this donation as this will help determine whether there is certainty of objects of the reversionary class. The money is to be divided to the “members of the LCA”, and thus Borris has fixed a class.

The trustees have discretion to apportion the trust property among the class “as they see fit.” This part of Borris’s will therefore discloses a discretionary trust for the class or a special power of appointment given to the trustees to appoint amoungst the class. Of course, the difference is crucial so far as the executors are concerned because, if this a discretionary trust, they are under a mandatory obligation to make a selection from among the class and distribute the property whereas, if this is a power, they may decide not to distribute and cannot be compelled to do so. Whether this disposition discloses a trust or a power is a matter of construction and the disctinction is not always easy to draw[16]. The test that must be applied is whether it is possible to say with certainty whether any given person is, r is not, a member of the class. Unfortunately, although this test is easy to state, it is difficult to apply because the leading case on its application gives three alternative approaches[17]. According to Stamp LJ, the test is satisfied only if it is possible to say in fact whether any given person is, or is not, a member of the class and this requires both the class to be defined with precision and there to be enough evidence available to make a positive or negative choice in respect of all of the potential applications. This is a strict test and it is therefore unlikely that on this basis this gift would succeed. It is likely that it would fail and therefore that the money would go to the RSPCA. The second approach is to that the test is satisfied if it is possible to say, in theory, whether any given person is, or is not, a member of the class, irrespective of whether there is enough evidence to make such a decision. The class must be conceptually precise. It is unlikely that Borris’s will will satisfiy this requirement and therefore again on this approach the gift will fail and the money will go to the RSPCA. The final version of this test is that it is satisfied if it can be said that of a substantial number of person that they were inside the class, even if it could not be said of every potential person whether he or she was not. It is likely that this test could be satisfied in some respects in so far as they are all members of the LCA but it is not certain that those members who are “worthy” of the award could be picked – it is therefore envisaged again that his will fail. Certainty of objects must also be discussed in relation to the birthday party.

The party is to be held for “my friends.” Borris has instructed that the money should go to the “friends”. As discussed certainty of objects is perhaps the most important certainty and this requires that the beneficiaries under the trust must either be named individually or be described by reference to a class description that is itself certain in scope. The test that must be applied is whether it is possible to say with certainty whether any given person is, or is not, a member of the class. Unfortunately, although this test is easy to state, it is difficult to apply because the leading case on its application gives three alternative approaches[18]. According to Stamp LJ, the test is satisfied only if it is possible to say in fact whether any given person is, or is not, a member of the class and this requires both the class to be defined with precision and there to be enough evidence available to make a positive or negative choice in respect of all of the potential applications. This is a strict test and it is therefore unlikely that on this basis this gift would succeed. It is likely that that the gift will succeed as it is to a defined set of persons, those being Boris’s friends. Finally it would appear, as discussed above, that Davina and Natasha are trustees and therefore there death has important connotations for the administration of Borris’s estate as they were holding all property on trust. General powers of appointment of new trustees can be found in the Trustee Act 1925 and the Trusts of Land and Appointment of Trustees Act 1996. Davina and Natasha however have now died. Trustees hold the trust property as joint tenants and so on any death of the trustee the property automatically vests in the remaining trustees.

They should, of course, ensure that all the trust property is duly registered in the names of the remaining trustees; for example, any shares must be placed in the names of the surviving trustees. The office of trustee is also held jointly and will pass to the surviving trustees. On the death of the last surviving or sole trustee the trust property devolves on his personal representatives, who hold the property on the terms of the trusts. Section 18 (2) allows, but does not compel, the personal representatives to exercise all the powers of the dead trustee. Once a new trustee is appointed the powers of the personal representatives end. Bibliography Legislation Settled Land Act 1925 Trustee Act 2000 Cases Harrison v Randall [1852] 9 HARE 397 IRC v Bernstein 1961] 1 Ch 399 Knight v Knight (1840) 3 Beav 171 Lee v Brown (1798) 4 Ves 362 McCormick v Grogan (1869) LR 4 HL 82 McPhail v Doulton [1973] Ch 9 Re Diplock [1948] 1 Ch 465 Re Vestey’s Settlement [1951] Ch 209 Pilkington v IRC [1964] AC 612 Wright v Atkyns (1823) Turn & R 143 Books Birks P, (2002), “Receipt in Breach of Trust”, Hart Publishing, Oxford Hayton D J, (2005) Hayton and Marshall: Commentary on the Law of Trusts and Equitable Obligations” Ramjohn M, (2004) “Cases and Materials on Trusts”, Third Edition, Cavendish Publishing Riddall J G, (2002), “The Law of Trusts”, Sixth Edition, Butterworths, Lexis-Nexis Todd P & Watt G (2003), “Cases and Materials on Equity and Trusts”, Fourth Edition, Oxford University Press Watt G, (2004), “ Textbook on Trusts” , Oxford University Press 1

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Footnotes

[1] Trustee Act 1925 s69 (2)

[2] [1961] 1 Ch 399

[3] [1957] 1 ALL ER 690

[4] Riddall J, (1979) “”Re Ransome Revisited or “First Good News”, 43 Conv 423

[5] Re Vestey’s Settlement [1951] Ch 209

[6] [1964] AC 612

[7] S69(2) Trustee Act 1925

[8] S32 (1)(c) Trustee Act 1925

[9] Re Diplock [1948] 1 Ch 465 [10] Harrison v Randall [1852] 9 HARE 397 [11] Lee v Brown (1798) 4 Ves 362 [12] Trustee Act 2000 section 11 (2) [13] McCormick v Grogan (1869) LR 4 HL 82 [14] Knight v Knight (1840) 3 Beav 171 [15] As per Lord Eldon in Wright v Atkyns (1823) Turn & R 143 [16] McPhail v Doulton [1973] Ch 9 [17] McPhail v Doulton [1973] Ch 9 [18] McPhail v Doulton [1973] Ch 9

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